Bright Mountain Media, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Con dition and Results of Operations. The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2023. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include, but are not limited to, those identified below, and in the section "Cautionary Statement Regarding Forward-Looking Information", those discussed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023, and in any subsequent filing we make with the SEC. Business Overview Organization and Nature of Operations Bright Mountain Media, Inc. (together with its wholly-owned subsidiaries, the “Company,” “Bright Mountain” or “we”) has an end-to-end digital media and advertising services platform that efficiently connects brands with targeted consumer demographics. We focus on digital publishing, advertising technology, consumer insights, creative and media services. During the year ended December 31, 2023, the Company completed the acquisition of two business units of Big Village (Big Village Insights, Inc., and Big Village Agency LLC (together, referred to as the "Big Village Entities")), in an all-cash transaction funded by the Centre Lane Senior Secured Credit Facility (the "Big Village Acquisition"). Digital Publishing Our digital publishing division focuses on developing content that attracts an audience and monetizes that audience through advertising. The current portfolio of owned and operated websites is focused on moms, parenting, families, and more broadly, women. The portfolio consists of popular websites including Mom.com, Cafemom.com, LittleThings.com, and MamasLatinas.com. This demographic is highly sought after by brands and their advertising agencies. We use internal and external technologies to constantly improve the effectiveness and efficiency of the content we create. Our publishing division monetizes its audiences through both direct and programmatic advertising sales. Advertising Technology Our advertising technology division focuses on delivering targeted ads to audiences on owned and operated sites as well as third-party publishers in a cost-effective manner through the deployment of proprietary technologies. By developing our own proprietary technology stack, we are able to pass along efficiencies to both the demand and supply side of the ecosystem. Our goal is to enable and support a streamlined, end-to-end advertising model that addresses both demand (buy side) and publisher supply (sell side) programmatic sales and delivery of digital advertisements using an array of audience targeting tools and advertising formats (display, audio, video, CTV, and in-app). Programmatic advertising relies on software programs that leverage data and proprietary algorithms to match the optimal selection of an ad with a bid price offered by advertisers. Consumer Insights Our consumer insights division focuses on providing primary and secondary research, competitive intelligence, and expert insight to address customers' strategic issues. We provide cutting-edge and dynamic research, offering clients a comprehensive perspective on their consumers. This insight extends to strategic guidance on the optimal timing and channels to effectively connect with target audiences. Our cutting-edge approach combines advanced data analytics and comprehensive market research, to uncover actionable insights that drive informed decision-making. Creative Services Our creative services division transforms data into award-winning campaigns. We are uniquely able to leverage insights teams with highly strategic media planning and buying teams to ensure brands not only position their advertising precisely, but also yield impactful business results. Our goal is to combine data-driven decisions with creativity fueled by a deep understanding of modern culture. 32 Table of Contents Media Services Our media services division focuses on advertisers and agencies by providing access to premium inventory, leveraging data to optimize programmatic campaigns. Our aim is to empower clients to access the most sought-after advertising spaces across diverse platforms tailored to their specific needs and preferences. Our data-driven approach ensures that ad placements are not only well-targeted, but also continuously optimized for maximum efficiency and return on investment. Our commitment to combining premium inventory access with data-driven programmatic campaign optimization makes us an indispensable partner in the success of our clients' advertising and marketing endeavors. The Company generates revenue through: • the selling of advertisements placed on our owned and managed sites and on partner websites where we earn a share of the revenue; • facilitating the seamless, real-time exchange of advertisements on a large scale, bridging networks of buyers (referred to as "DSPs") and networks of sellers (referred to as "SSPs"); • serving advertisers through providing access to premium resources and leveraging data to optimize programmatic campaigns, where revenue is derived from the planning and execution of creative and media marketing campaigns; and • providing primary and secondary research, competitive intelligence, and expert insights to address customers' strategic issues, where revenue is primarily derived from providing a single integrated service for such research. Key Factors Affecting Our Performance Seasonal Fluctuations . Typically advertising technology companies report a material portion of their revenues during the third and fourth calendar quarter as a result of back-to-school and holiday-related advertising spend. We continue to experience this trend in our advertising technology division. Because of seasonal fluctuations, there can be no assurance that the results of any quarter or full year will be indicative of results for future years or quarters. Limited Number of Customers . During the nine months ended September 30, 2024 and 2023, one customer represented 13.4% and 13.5% of revenue, respectively. Managing Industry Dynamics . We operate in the rapidly evolving digital advertising industry. Advances in programmatic advertising technologies, and the efficient and automated method of purchasing ads online, has enabled publishers to auction their ad inventory to more buyers simultaneously, in real time. As advertisers stay ahead of evolving trends in consumer engagement with digital media, an expansive opportunity for innovation emerges. Our commitment to understanding customer needs empowers us, and our continuous pursuit of innovation enables swift adaptation to industry shifts. This approach not only facilitates the development of cutting-edge solutions, but also does so in a cost-effective manner. As regulatory concerns accelerate the impact on existing industry standards, companies are actively seeking new methods to finely tailor their messages to target audiences. Tech companies will be limited in how they monetize personal information for advertising purposes. This trend is exemplified by two imminent developments: (1) the anticipated erosion of Google's third-party cookies and (2) the data security measures integrated into Apple iPhone. Consequently, companies must explore innovative methods to better understand their target audiences and have the tools to effectively engage with them. 33 Table of Contents Key Operating and Financial Metrics We monitor the following key financial and operational metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. The following is our analysis for the three and nine months ended September 30, 2024 and 2023: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (in thousands) Revenue $ 14,151 $ 15,289 $ 39,602 $ 29,403 Cost of revenue 9,764 11,927 28,656 22,059 Gross margin 4,387 3,362 10,946 7,344 General and administrative expenses 4,414 4,121 14,927 14,923 Impairment of goodwill and intangibles - 16,259 - 16,259 Financing and other expense, net (3,229 ) (2,749 ) (9,210 ) (5,796 ) Net loss from operations $ (3,256 ) $ (19,767 ) $ (13,191 ) $ (29,634 ) Adjusted EBITDA (1) $ 804 $ 283 $ (1,274 ) $ (3,633 ) (1) - For a reconciliation of net loss to Adjusted EBITDA see “Use of Non-GAAP Financial Measures” below. Revenue The Company generates revenue through: • the selling of advertisements placed on our owned and managed sites and on partner websites where we earn a share of the revenue; • facilitating the seamless, real-time exchange of advertisements on a large scale, bridging networks of buyers (referred to as "DSPs") and networks of sellers (referred to as "SSPs"); • serving advertisers through providing access to premium resources and leveraging data to optimize programmatic campaigns, where revenue is derived from the planning and execution of creative and media marketing campaigns; and • providing primary and secondary research, competitive intelligence, and expert insights to address customers' strategic issues, where revenue is primarily derived from providing a single integrated service for such research. Revenue decreased $1.1 million or 7%, for the three months ended September 30, 2024, compared to the same period in 2023. Revenue increased $10.2 million, or 35%, for the nine months ended September 30, 2024, compared to the same period in 2023. See below for a detailed analysis of revenue for the three and nine months ended September 30, 2024, and 2023. Cost of Revenue Cost of revenue includes internal labor and payment to third parties for services performed to drive revenue, which includes the publisher cost paid for ad exchange on third party sites, advertising fees, personnel costs, technology and data related costs, fees paid for content creation, influencers, writers, and sales commission. Cost of revenue decreased approximately $2.1 million, or 18%, for the three months ended September 30, 2024 compared to the same period in 2023. Cost of revenue increased approximately $6.6 million or 30%, for the nine months ended September 30, 2024 compared to the same period in 2023. See below for a detailed analysis of cost of revenue for the three and nine months ended September 30, 2024, and 2023. General and Administrative Expenses General and administrative expenses consist primarily of (i) personnel and related costs for our executive, finance and accounting, human resources, and, administrative personnel, including salaries, benefits, bonuses, and stock-based compensation; (ii) legal, accounting, and other professional service fees; (iii) other corporate expenses; (iv) information technology costs; and (v) facility costs. 34 Table of Contents General and administrative expenses increased approximately $300,000, or 7%, for the three months ended September 30, 2024 compared to the same period in 2023. General and administrative expenses remained consistent for the nine months ended September 30, 2024 compared to the same period in 2023. See below for a detailed analysis of general and administrative expenses for the three and nine months ended September 30, 2024 and 2023. Results of Operations The following is our analysis of the results of operations for the periods indicated below. This analysis should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this Quarterly Report on Form 10-Q. Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023 Net loss from operations for the quarter ended September 30, 2024 was $27,000 as compared to a net loss of $17.0 million for the same period in 2023. The following is our analysis for the period: Three Months Ended September 30, 2024 September 30, 2023 Change (in thousands) Revenue $ 14,151 $ 15,289 $ (1,138 ) -7 % Cost of revenue 9,764 11,927 (2,163 ) -18 % Gross margin 4,387 3,362 1,025 30 % General and administrative expenses 4,414 4,121 293 7 % Impairment of goodwill and intangibles - 16,259 (16,259 ) -100 % Loss from operations (27 ) (17,018 ) 16,991 (100 )% Financing and other expense, net (3,229 ) (2,749 ) (480 ) 17 % Net loss from operations $ (3,256 ) $ (19,767 ) $ 16,511 (84 )% Gross margin percentage 31 % 22 % 9 % Revenue Our revenue decreased $1.1 million, or 7%, for the three months ended September 30, 2024, compared to the same period in 2023. The reduction in revenue was largely attributable to our digital publishing and consumer insihts divisions. Changes in revenue generated by each such division are set forth below: Three Months Ended September 30, 2024 September 30, 2023 Change (in thousands) Digital publishing $ 519 $ 1,037 $ (518 ) (50 )% Advertising technology 4,661 3,643 1,018 28 % Consumer insights 6,765 8,015 (1,250 ) (16 )% Creative services 1,616 1,801 (185 ) (10 )% Media services 590 793 (203 ) (26 )% $ 14,151 $ 15,289 $ (1,138 ) -7 % Digital Publishing Digital publishing revenue decreased by $0.5 million, or 50%, for the three months ended September 30, 2024,compared to the same period in 2023. Approximately $0.5 million, or 4%, of the Company’s revenue for the three months ended September 30, 2024, was generated from our digital publishing customers, compared to $1.0 million, or 7%, for the same period in 2023. This division was significantly impacted by macroeconomic factors, which reduced traffic to our website, coupled with an overall reduction in spending by some customers related to inflationary concerns and reduction in website traffic. 35 Table of Contents Advertising Technology Advertising technology revenue increased by $1.0 million or 28%, for the three months ended September 30, 2024, compared to the same period in 2023. Approximately $4.7 million, or 33%, of the Company’s revenue for the three months ended September 30, 2024, was generated from our advertising technology customers compared to $3.6 million, or 24%, for the same period in 2023. This growth was driven by our ability to leverage our resources to attract top advertisers, which in turn has allowed us to onboard premium publishers. This led to an increase in volume, as well as rates and overall revenue. Consumer Insights Consumer insights revenue decreased by $1.2 million or 16%, for the three months ended September 30, 2024, compared to the same period in 2023. Approximately $6.8 million, or 48%, of the Company’s revenue for the three months ended September 30, 2024 was generated from our consumer insights customers compared to $8.0 million, or 52%, for the same period in 2023. This decrease was primarily related to the slowdown of Altria product testing, resulting in a negative revenue impact. Creative Services Creative services revenue decreased by $185,000 or 10% for the three months ended September 30, 2024, compared to the same period in 2023. Approximately $1.6 million, or 11%, of the Company’s revenue for the three months ended September 30, 2024, was generated from our creative services customers compared to $1.8 million, or 12% for the same period in 2023. This decrease was primarily related to a decrease in the number of projects for smaller tier revenue customers. Media Services Media services revenue decreased by $203,000, or 26%, for the three months ended September 30, 2024, compared to the same period in 2023. Approximately $600,000, or 4%, of the Company’s revenue for the three months ended September 30, 2024, was generated from our media services customers compared to $793,000, or 5%, for the same period in 2023. This decrease was primarily related to the timing of customer needs and the moving of certain projects to year-end. Cost of Revenue Three Months Ended September 30, 2024 September 30, 2023 Change (in thousands) Direct salaries and labor costs $ 1,541 $ 2,674 $ (1,133 ) (42 )% Direct project costs 3,002 3,489 (487 ) -14 % Non-direct project costs 1,755 2,880 (1,125 ) (39 )% Publisher costs 3,023 2,085 938 45 % Content creation 175 228 (53 ) (23 )% Sales commissions 308 344 (36 ) -10 % Other (40 ) 227 (267 ) -118 % $ 9,764 $ 11,927 $ (2,163 ) -18 % Cost of revenue decreased $2.1 million or 18% for the three months ended September 30, 2024, compared to the same period for 2023. This reduction is due to the factors discussed below: Direct Salaries and Labor Cost Direct salaries and labor cost decreased $1.1 million, or 18%, for the three months ended September 30, 2024, when compared to the same period in 2023. Approximately $1.5 million, or 15%, of the Company's cost of revenue for the three months ended September 30, 2024, was a result of direct salaries and labor cost compared to $2.7 million, or 23% the same period in 2023. These costs represent salary and labor cost of employees that work directly on customer projects for our consumer insights, creative and media services divisions. 36 Table of Contents Direct Project Cost Direct project cost decreased $487,000, or 14%, for the three months ended September 30, 2024 when compared to the same period in 2023. Approximately $3.0 million, or 31%, of the Company's cost of revenue for the three months ended September 30, 2024, was a result of direct project cost compared to $3.5 million, or 29%, during the same period in 2023. These costs include payments made to third-parties that are directly attributable to the completion of projects that allow for revenue recognition for our consumer insights, creative and media services divisions. The decrease in direct project costs is related to the decrease in revenue from our consumer insights, creative and media services divisions. Non-Direct Project Cost Non-direct cost was $1.8 million, or 18%, of the Company's cost of revenue for the three months ended September 30, 2024, compared to $2.9 million, or 24%, for the same period in 2023. These costs represent overall client service costs that are not specifically related to a particular project, but relate to services for our consumer insights, creative and media services divisions. The decrease in non-direct project costs is related to the decrease in revenue from our consumer insights, creative and media services divisions. Publisher Cost Publisher cost was $3.0 million, which represents 31% of overall cost of revenue, and $2.1 million, or 18%, of overall cost of revenue, for the three months ended September 30, 2024 and 2023, respectively. We experienced an increase of $930,000, or 45%, for the three months ended September 30, 2024, compared to the same period in 2023. This increase is consistent with the increase noted in revenue for our advertising technology division. These costs represent payments to media providers and website publishers. Gross Margin Gross margin was $4.4 million and $3.4 million for the three months ended September 30, 2024 and 2023, respectively. Our gross margin increased $1.0 million, or 31%, for the three months ended September 30, 2024, when compared to the same period of 2023. Gross margin as a percentage of revenue increased to 31% for the three months ended September 30, 2024 compared to 22% for the same period of 2023. General and Administrative Expenses Three Months Ended September 30, 2024 September 30, 2023 Change (in thousands) Personnel costs $ 1,920 $ 2,301 $ (381 ) (17 )% Legal fees 158 211 (53 ) (25 )% Professional fees 799 (643 ) 1,442 (224 )% Insurance 193 328 (135 ) (41 )% Depreciation 36 38 (2 ) (6 )% Amortization 480 829 (349 ) (42 )% Website expenses 351 290 61 21 % Data processing 262 224 38 17 % Other 215 543 (328 ) (60 )% $ 4,414 $ 4,121 $ 293 7 % Gross margin as a percentage of general and administrative expense 99 % 82 % 18 % General and administrative expenses increased by $293,000 or 7%, for the three months ended September 30, 2024, compared to the same period in 2023. The increase is due to a combination of factors as discussed below. Personnel Cost Personnel cost decreased by approximately $381,000, or 17%, for the three months ended September 30, 2024, compared to the same period in 2023. This change is mainly driven by a decrease in the Company's head count by a net change of 47 employees, including 13 employees that were terminated as a reduction in force. The Company employee's headcount was 141 and 188 at September 30, 2024 and 2023, respectively. 37 Table of Contents Professional Fees Professional fees increased by $1.4 million, or 224%, for the three months ended September 30, 2024, compared to the same period in 2023. This increase is mainly driven by an increase in legal fees related to the Ladenburg litigation as discussed in Note 17 above. Data Processing Data processing increased by $38,000, or 17%, for the three months ended September 30, 2024, compared to the same period in 2023. Impairment of Goodwill and Intangibles During the three months ended September 30, 2023, the Company performed an assessment of its goodwill and intangible assets. The assessment indicated that the carrying value was in excess of its implied fair value, resulting in an impairment charge of $13.7 million and $2.5 million for goodwill and intangibles, respectively. There was no impairment recorded for the same period of 2024. Financing and Other Expense, Net Three Months Ended September 30, 2024 September 30, 2023 Change (in thousands) Interest expense $ 3,260 $ 2,783 $ 477 17 % Other expense (income) (31 ) (34 ) 3 (8 )% Total financing and other expense, net $ 3,229 $ 2,749 $ 480 17 % Financing and other expense, net increased by $480,000, or 17%, for the three months ended September 30, 2024, compared to the same period in 2023. This increase was largely attributable to a $477,000 increase in interest expense related to the Centre Lane Senior Secured Credit Facility, which reflected higher principal and fees due to the Centre Lane Senior Secured Credit Facility amendments during the year ended December 31, 2023. Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023 Net loss from operations for the nine months ended September 30, 2024 was $4.0 million as compared to a net loss of $23.8 million for the same period in 2023. The following is our analysis for the period. Nine Months Ended September 30, 2024 September 30, 2023 Change (in thousands) Revenue $ 39,602 $ 29,403 $ 10,199 35 % Cost of revenue 28,656 22,059 6,597 30 % Gross margin 10,946 7,344 3,602 49 % General and administrative expenses 14,966 14,923 43 0 % Impairment of goodwill and intangibles — 16,259 (16,259 ) -100 % Loss from operations (4,020 ) (23,838 ) 19,857 -83 % Financing and other expense, net (9,210 ) (5,796 ) (3,414 ) 59 % Net loss from operations $ (13,230 ) $ (29,634 ) $ (16,443 ) -55 % Gross margin percentage 28 % 25 % 3 % 38 Table of Contents Revenue Our revenue increased by $10.2 million, or 35%, for the nine months ended September 30, 2024 compared to the same period in 2023. For the nine months ended September 30, 2024, revenue includes $27.3 million, which represents the impact of the Big Village Acquisition, which was completed in April 2023. This compares to $19.8 million for the same period in 2023. Changes in revenue generated by each such division are set forth below: Nine Months Ended September 30, 2024 September 30, 2023 Change (in thousands) Digital publishing $ 1,468 $ 3,442 $ (1,974 ) (57 )% Advertising technology 10,874 6,147 4,727 77 % Consumer insights 20,132 14,898 5,234 35 % Creative services 5,332 3,486 1,846 53 % Media services 1,796 1,430 366 26 % $ 39,602 $ 29,403 $ 10,199 35 % Digital Publishing Digital publishing revenue decreased by $2.0 million, or 57%, for the nine months ended September 30, 2024, compared to the same period in 2023. Approximately $1.5 million, or 4%, of the Company’s revenue for the nine months ended September 30, 2024, was generated from our digital publishing customers compared to $3.4 million, or 12%, for the same period in 2023. This division was significantly impacted by macroeconomic factors, which reduced traffic to our website, coupled with an overall reduction in spending by some customers related to inflationary concerns and reduction in website traffic. Advertising Technology Advertising technology revenue increased by $4.7 million, or 77%, for the nine months ended September 30, 2024, compared to the same period in 2023. Approximately $10.9 million, or 28%, of the Company’s revenue for the nine months ended September 30, 2024, was generated from our advertising technology customers compared to $6.1 million, or 21%, for the same period in 2023. This growth was driven by our ability to leverage our resources to attract top advertisers, which in turn has allowed us to onboard premium publishers. This led to an increase in volume, as well as rates and overall revenue. Consumer Insights Consumer insights revenue increased by $5.2 million, or 35%, for the nine months ended September 30, 2024, compared to the same period in 2023. Approximately $20.1 million, or 51%, of the Company’s revenue for the nine months ended September 30, 2024 was generated from our consumer insights customers compared to $14.9 million, or 51%, for the same period in 2023. As discussed above, the Big Village Acquisition was completed in April 2023, and is the main driver of the increase in consumer insights revenue for the nine months ended September 30, 2024. Creative Services Creative services revenue increased by $1.8 million or 53%, for the nine months ended September 30, 2024, compared to the same period in 2023. Approximately $5.3 million, or 13% of the Company’s revenue for the nine months ended September 30, 2024, was generated from our creative services customers compared to $3.5 million, or 12%, for the same period in 2023. As discussed above, the Big Village Acquisition was completed in April 2023, and is the main driver of the increase in creative services revenue for the nine months ended September 30, 2024. Media Services Media services revenue increased by $366,000 or 26%, for the nine months ended September 30, 2024, compared to the same period in 2023. Approximately $1.8 million, or 5%, of the Company’s revenue for the nine months ended September 30, 2024, was generated from our media services customers compared to $1.4 million, or 5%, for the same period in 2023. As discussed above, the Big Village Acquisition was completed in April 2023, and is the main driver of the increase in media services revenue for the nine months ended September 30, 2024. 39 Table of Contents Cost of Revenue Nine Months Ended September 30, 2024 September 30, 2023 Change (in thousands) Direct salaries and labor costs $ 5,617 $ 5,202 $ 415 8 % Direct project costs 9,201 6,065 3,136 52 % Non-direct project costs 5,459 5,272 187 4 % Publisher costs 7,121 3,701 3,420 92 % Content creation 527 826 (299 ) (36 )% Sales commissions 656 592 64 11 % Other 75 401 (326 ) (81 )% $ 28,656 $ 22,059 $ 6,597 30 % Cost of revenue increased $6.6 million, or 30%, for the nine months ended September 30, 2024, compared to the same period of 2023. For the nine months ended September 30, 2024, cost of revenue includes $20.3 million, or 71% from the impact of the Big Village Acquisition, which was completed in April 2023. This compares to $16.5 million, or 75%, for the same period in 2023. As a result, the Big Village Acquisition is the main driver of the increase in cost of revenue for the nine months ended September 30, 2024. Direct Salaries and Labor Cost Direct salaries and labor cost increased $415,000, or 8%, for the nine months ended September 30, 2024, when compared to the same period in 2023. Approximately $5.1 million, or 20%, of the Company's cost of revenue for the nine months ended September 30, 2024 was a result of direct salaries and labor cost compared to $5.2 million, or 24%, for the same period in 2023. As discussed above, the Big Village Acquisition, which was completed in April 2023, is the main driver of the increase in direct salaries and labor cost for the nine months ended September 30, 2024. These costs represent salary and labor cost of employees that work directly on customer projects for our consumer insights, creative and media services divisions. Direct Project Cost Direct project cost increased $3.1 million, or 52%, for the nine months ended September 30, 2024 when compared to the same period in 2023. Approximately $9.2 million, or 32%, of the Company's cost of revenue for the nine months ended September 30, 2024, was a result of direct project cost compared to $6.1 million, or 27%, for the same period in 2023. As discussed above, the Big Village Acquisition, which was completed in April 2023, is the main driver of the increase in direct project cost for the nine months ended September 30, 2024. These costs include payments made to third-parties that are directly attributable to the completion of projects that allow for revenue recognition for our consumer insights, creative and media services divisions. Non-Direct Project Cost Non-direct project cost increased $187,000, or 4%, for the nine months ended September 30, 2024, when compared to the same period in 2023. Approximately $5.5 million, or 19%, of the Company's cost of revenue for the nine months ended September 30, 2024, was a result of non-direct project cost compared to $6.1 million, or 24%, for the same period in 2023. As discussed above, the Big Village Acquisition, which was completed in April 2023, is the main driver of the increase in non-direct project cost for the nine months ended September 30, 2024. These costs represent overall client service costs that are not specifically related to a particular project. Publisher Cost Publisher cost was $7.1 million, which represents 25% of overall cost of revenue, and $3.7 million, or 17%, of overall cost of revenue for the nine months ended September 30, 2024 and 2023, respectively. We experienced an increase of $3.4 million, or 92%, for the nine months ended September 30, 2024 compared to the same period in 2023. This increase is consistent with the increase noted in revenue for our advertising technology division. These costs represent payments to media providers and website publishers which drive revenue for our advertising technology division. Gross Margin Our gross margin increased $3.6 million, or 49%, for the nine months ended September 30, 2024, compared to the same period of 2023. Gross margin as a percentage of revenue increased to 28% for the nine months ended September 30, 2024, compared to 25% for the same period of 2023. 40 Table of Contents General and Administrative Expenses Nine Months Ended September 30, 2024 September 30, 2023 Change (in thousands) Personnel costs $ 6,797 $ 6,063 $ 734 12 % Legal fees 946 871 75 9 % Professional fees 2,401 2,931 (530 ) (18 )% Insurance 607 760 (153 ) (20 )% Depreciation 111 84 27 32 % Amortization 1,442 1,943 (501 ) (26 )% Website expenses 1,027 977 50 5 % Data processing 972 422 550 130 % Other 663 872 (209 ) (24 )% $ 14,966 $ 14,923 $ 43 0 % Gross margin as a percentage of general and administrative expense 73 % 49 % 24 % General and administrative expenses increased by $43,000 for the nine months ended September 30, 2024, compared to the same period in 2023. The increase is primarily due to a combination of factors as discussed below: Personnel Cost Personnel cost increased by $734,000, or 12%, for the nine months ended September 30, 2024 compared to the same period in 2023. The Company reduced its head count by 47 employees, including 22 employees that were terminated as a reduction in force. The Company incurred severance cost of approximately $93,000 in connection with this reduction. The Company incurred severance cost of approximately $322,000 associated with a head count reduction during the same period for 2023. Professional Fees Professional fees decreased by $530,000 or 18% for the nine months ended September 30, 2024, compared to the same period in 2023. $685,000 of professional fees for the nine months ended September 30, 2023 represented costs associated with the Big Village Acquisition. Data Processing Data processing increased by $550,000, or 130%, for the nine months ended September 30, 2024, compared to the same period of 2023. As discussed above, the Big Village Acquisition was completed in April 2023, and contributed to data processing for six months of the prior period and for the full nine months of the current period, and is the main driver of the increase in data processing for the nine months ended September 30, 2024. Impairment of Goodwill and Intangibles During the nine months ended September 30, 2023, the Company performed an assessment of its goodwill and intangible assets. The assessment indicated that the carrying value was in excess of its implied fair value, resulting in an impairment charge of $13.7 million and $2.5 million for goodwill and intangibles, respectively. There was no impairment recorded for the same period of 2024. Financing and Other Expense, Net Nine Months Ended September 30, 2024 September 30, 2023 Change (in thousands) Interest expense $ 9,638 $ 6,211 $ 3,427 55 % Other expense (income) (428 ) (415 ) (13 ) 3 % Total financing and other expense, net $ 9,210 $ 5,796 $ 3,414 59 % 41 Table of Contents Financing and other expense, net increased by $3.4 million, or 59%, for the nine months ended September 30, 2024, compared to the same period during 2023. This increase was largely attributable to $3.4 million or 55%, increase in interest expense related to the Centre Lane Senior Secured Credit Facility which reflected higher principal and fees due to the Centre Lane Senior Secured Credit Facility amendments during the year ended December 31, 2023. Use of Non-GAAP Financial Measure Non-GAAP results are presented only as a supplement to the financial statements and for use within management's discussion and analysis based on U.S. generally accepted accounting principles ("GAAP"). The non-GAAP financial information is provided to enhance the reader's understanding of the Company's financial performance, but non-GAAP measures should not be considered in isolation or as a substitute for financial measures calculated in accordance with GAAP. All of the items included in the reconciliation from net loss before taxes to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation, etc.) or (ii) items that management does not consider to be useful in assessing the Company's ongoing operating performance (e.g., M&A costs, income taxes, gain on sale of investments, loss on disposal of assets, etc.). In the case of the non-cash items, management believes that investors can better assess the Company's operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect the Company's ability to generate free cash flow or invest in its business. We use, and we believe investors benefit from the presentation of, EBITDA and Adjusted EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that EBITDA is useful to investors and other external users of our financial statements in evaluating our operating performance because EBITDA is widely used by investors to measure a company's operating performance without regard to items such as interest expense, taxes, and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired. Because not all companies use identical calculations, the Company's presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating the Company's performance against its peer companies because management believes the measures provide users with valuable insight into key components of GAAP financial disclosures. A reconciliation of net loss before taxes to non-GAAP EBITDA and Adjusted EBITDA is as follows: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (in thousands) Net loss before tax $ (3,256 ) $ (19,767 ) $ (13,230 ) $ (29,634 ) Depreciation expense 36 38 111 84 Amortization of intangibles 480 829 1,442 1,943 Impairment of goodwill and intangibles - 16,259 - 16,259 Amortization of debt discount 691 594 2,243 1,438 Other interest expense 10 8 32 18 Interest expense - Centre Lane Senior Secured Credit Facility and Convertible Promissory Notes 2,559 2,181 7,364 4,754 EBITDA 520 142 (2,038 ) (5,138 ) Stock compensation expense 57 56 191 114 Non-recurring professional fees 167 - 167 685 Non-recurring legal fees 60 - 313 384 Non-recurring severance expense - 85 93 322 Adjusted EBITDA $ 804 $ 283 $ (1,274 ) $ (3,633 ) 42 Table of Contents Liquidity and Capital Resources Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. The following table summarizes total current assets, total current liabilities, and net working capital (deficit) as of September 30, 2024, as compared to December 31, 2023. September 30, 2024 December 31, 2023 (in thousands) Total current assets $ 15,785 $ 19,737 Total current liabilities 28,746 30,802 Net working capital deficit $ (12,961 ) $ (11,065 ) As of September 30, 2024, we had a cash balance of $2.5 million compared with a cash balance of $4.0 million as of December 31, 2023. The Company’s liquidity needs, and a discussion of how it intends to meet those needs, is discussed below. See –“Going Concern.” Going Concern Historically, the Company has incurred losses, which have resulted in an accumulated deficit of approximately $163.1 million as of September 30, 2024. Cash flows used in operating activities were $451,000 and $5.9 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, the Company had a working capital deficit of approximately $13.0 million, inclusive of $2.5 million in cash and cash equivalents. The Company's current cash and working capital, as of the filing of this Quarterly Report on Form 10-Q, is not expected to be sufficient to fund its anticipated level of operations over the next twelve months. As a result, such matters create a substantial doubt regarding the Company’s ability to meet its financial obligations and continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to meet its liquidity needs through a combination of factors. During the next year, we anticipate that we will need approximately $6.3 million to meet our contractual obligations in addition to amounts needed for our working capital needs. The Company is currently exploring several strategic alternatives, including restructuring, or refinancing its debt, or seeking additional debt, including borrowing under the Centre Lane Senior Secured Credit Agreement, or raising equity capital. The ability to access the capital markets depends, in part, upon the volume and market price of the Company's stock, which cannot be assured. Other measures include reducing or delaying certain business activities, and reducing general and administrative expenses, including a reduction in headcount. The ultimate success of these plans is not guaranteed. The accompanying unaudited consolidated financial statements are prepared on a going concern basis and do not include any adjustments that might result from uncertainty about the Company’s ability to continue as a going concern. Financing Arrangement Summary Centre Lane Senior Secured Credit Facility On June 5, 2020, the Company and its subsidiaries entered into to the Amended and Restated Senior Secured Credit Agreement between themselves, the lenders party thereto and Centre Lane Partners Master Credit Fund II, L.P., as Administrative Agent and Collateral Agent (“Centre Lane Partners”), as amended (the “Credit Agreement”). The Credit Agreement has been amended numerous times to change the terms, including the amounts outstanding, the interest rate, the maturity date and other payment terms. The outstanding principal owed to Centre Lane Partners was $77.0 million and $70.2 million as of September 30, 2024 and December 31, 2023, respectively, and matures on April 20, 2026. Of the amount outstanding at September 30, 2024, approximately $1.3 million is due by December 31, 2024 with $2.9 million due by September 30, 2025. The balance of $72.9 million is due in 2026. The amount due under the Credit Agreement bears interest at 7.0% per annum plus the Secured Overnight Financing Rate ("SOFR"). At September 30, 2024, the SOFR was 5.30%, thus the overall interest rate on this facility was 12.33% per annum at September 30, 2024. In connection with the Twentieth Amendment, adjustments were made to the interest rate for outstanding loans as follows: • Changing the last out term loan PIK rate to the SOFR plus 7% until December 31, 2024, and to the SOFR plus 2% (previously 5%) thereafter; 43 Table of Contents • Conversion of interest payable on the Seventeenth Amendment loans from April 2024 until June 30, 2025 from a combination of cash and PIK to solely PIK at the rate of 15%, with an option to maintain such terms after June 30, 2025 in exchange for an additional 2% PIK fee or transition to payments made 10% PIK and 5% in cash; • Extending the due date for the 5% exit fee with respect to the Nineteenth Amendment to December 31, 2024; For a full description of the Centre Lane Senior Secured Credit Facility, see Note 10, "Centre Lane Senior Secured Credit Facility," to the consolidated financial statements. Summary of Cash Flows The following table summarizes cash flow activities during the nine months ended September 30, 2024 and 2023: (in thousands) Nine Months Ended September 30, 2024 2023 Cash flow used in operating activities $ (451 ) $ (5,883 ) Cash flow used in investing activities (100 ) (14 ) Cash flow (used in) provided by financing activities (971 ) 8,357 Net (decrease) increase in cash and cash equivalents, net of impact of exchange rates $ (1,515 ) $ 2,464 Operating Activities Our largest source of operating cash is cash collections from customers from revenue. Our primary uses of our operating cash, are for cost of revenue expenses, personnel-related expenditures and other general administrative expenses. For the nine months ended September 30, 2024, cash used in operating activities was $451,000. The primary factors affecting our operating cash flows during the period were our net loss of $13.2 million, adjusted for non-cash charges of $1.4 million for amortization of intangible assets, $2.2 million of amortization of debt discount, $6.9 million in interest paid in kind on the Centre Lane Senior Secured Credit Facility, $191,000 for stock compensation expense, and a $1.8 million net change in operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities were a $2.3 million increase in accounts receivable, a $543,000 decrease in accounts payable, and a $363,000 decrease in other liabilities, partially offset by a $200,000 increase in deferred revenue. For the nine months ended September 30, 2023, cash used in operating activities was $5.9 million. The primary factors affecting our operating cash flows during the period were our net loss of $29.6 million, adjusted for non-cash charges of $1.9 million for amortization of intangible assets, $1.4 million of amortization of debt discount, $16.3 million impairment of goodwill and intangibles, $4.5 million in interest paid in kind on the Centre Lane Senior Secured Credit Facility, $177,000 for the provision of bad debt, $115,000 for stock option compensation expense, and a $802,000 net change in operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities were a $277,000 increase in accounts receivables offset by a $2.3 million increase in accounts payable and accrued expenses, an increase in other liabilities of $2.2 million, an increase in prepaid expenses and other current assets of $573,000, and a $942,000 increase in deferred revenue. Investing Activities Cash used in investing activities of $100,000 and $14,000 for the nine months ended September 30, 2024 and 2023, respectively, was due to $14,000 and $14,000, respectively, for the purchase of property and equipment, and $86,000 for website enhancement during the nine months ended September 30, 2024. Financing Activities During the nine months ended September 30, 2024, the Company used cash of $892,000 in financing activities, which is largely attributable to repayment of principal on the Centre Lane Senior Secured Credit Facility of $879,000. During the nine months ended September 30, 2023, the Company drew $8.6 million of debt financing from the Centre Lane Senior Secured Credit Facility, which was used primarily to fund our working capital. Contractual Obligations and Commitments The Company leases its corporate offices in Boca Raton, Florida under a long-term non-cancellable lease agreement which was signed on June 14, 2022, with a lease term of five years beginning upon completion of improvements to the office space by the landlord, which was completed on September 12, 2022. The annual base rent is $100,000, with a provision for a 3% increase on each anniversary of the rent commencement date. The Company has the option to renew the lease for one additional five-year term. 44 Table of Contents As of September 30, 2024, the Company entered into two sublease agreements of its Boca Raton corporate offices. The subleases will continue for the remaining term on the initial lease agreement of 3 years with no option to extend. The aggregate minimum annual rental income under the subleases is approximately $137,000 with 3% escalations per annum. See Note 12, “ Leases ,” to the Company's consolidated financial statements for details regarding the Company’s lease. On June 30, 2024, the Company also entered into the Twentieth Amendment to the Credit Facility, which, among other things, restructured certain payments such that the amounts due within the next 12 months were reduced. See Note 10, “ Centre Lane Senior Secured Credit Facility ,” to the Company’s consolidated financial statements for details regarding the Twentieth Amendment. There were no other material changes in our contractual obligations and commitments from those disclosed above and in the Annual Report on Form 10-K for the year ended December 31, 2023. Off-Balance Sheet Arrangements As of September 30, 2024 and December 31, 2023, there were no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to shareholders. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of our unaudited consolidated financial statements as well as reported amounts of revenue and expenses during the periods presented. Our unaudited consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Significant estimates included in the accompanying consolidated financial statements include, valuation of goodwill and intangible assets, allowance for current expected credit losses, the determination of the relative selling prices of our services, percentage of completion for revenue recognition, estimates of amortization period for intangible assets, estimates of depreciation period for property and equipment, discount rates used in the valuation of right-of-use assets and lease liabilities, litigation reserves, the valuation of equity-based transactions, valuation of the Center Lane Senior Secured Facility carrying value regarding debt modification or extinguishment, and the valuation allowance on deferred tax assets. Critical accounting policies are those policies that management believes are very important to the portrayal of our financial position and results of operations, and that require management to make estimates that are difficult, subjective or otherwise complex. For further information on all of our significant accounting policies, see the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Recent Accounting Pronouncements Recent accounting pronouncements are detailed in the “Summary of Significant Accounting Policies” in Note 2 to our unaudited consolidated financial statements. Smaller Reporting Company Status We are a “smaller reporting company” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may continue to be a smaller reporting company even though we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as the market value of our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter. 45 Table of Contents